ASIAN BOND MARKETFORUM

University of Hong Kong

Hong KongNovember 11-14, 2003

Presentation By: Pamela Lamoreaux - IFCManager Housing Finance Group – Global Financial Markets

Organized by The Milken Institute& Asian Institute of InternationalFinancial Law

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What Are MultilateralsDevelopment OrganizationsSimilar Missions/Mandates-Alleviate/reduce poverty-Help people and the environment by providing resources, sharing knowledge, building capacity and forging partnerships in the public and private sectorCatalytic RolePromote democracyPromotes sustainable developmentCompetitors but partners

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Overview – IFC – WB Group

Founded: 1956Capital: US$ 2.45 bnShareholder: 175 member countries (must be IBRD member)Rating: AAAStaff: 2,000Headquarters: Washington, DCMany country officesOwn Portfolio at YE 2003: US$ 12.0 bnClients: Private Companies (at least 51% private ownership)Developing/transition countries : member countries Products: Long-term Loans, Syndicated loans, Equity, Mezzanine Financing, Equity Funds, Guarantees, Technical Assistance

13%

5%

28%

24%

7%

6%10%

7% FinancialInstitutionsTransport/CommunicationsUtilities

Chemicals

Food/Beverage

Gas/Oil/Mining

Information

Others

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New unit within Global Financial Markets Department

Formed 7/1/02FY03 approval: $57mFY03 commitment: $22m

Objective: housing finance market development in emerging market countries through advisory mandates and investments

Housing Finance at IFCHousing Finance at IFC

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WORK PROGRAM:

Primary market:Origination (lending to mortgage banks)Warehousing lines of credit Infrastructure support (credit insurance; equity investments in intermediaries)Capacity building (through technical assistance)

Secondary Market:MBS securitizations (mezzanine investment; partial credit guarantees)Regulatory reform (through technical assistance)

Housing Finance at IFCHousing Finance at IFC

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StructuringTechnical Assistance –helping “first time” issuersLegal and Regulatory assistance (drafting legislation, legal documents, regulatory environment)Partial guarantee on senior or mezzanine piecePurchase of certain trances of bondsNew innovative structures – Non-performing loans, etc. Bring international best practiceEncourage other local and international investors

ROLES OF IFC – HOUSING

BRING GLOBAL PERSPECTIVE

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Completed 24 transactions in 12 different countriesRaised a total of US$2,641mn with IFC’s credit exposure of only US$464mn (mobilized US$836.75mn during FY03)

•Russian Standard Bank (2) (two transactions)

•KoMoCo (1) (two transactions)•Sogeko (3)

•Bharti Mobile (2)•Ballarpur Industries (2)•NIIT-Citibank (1)

•Saudi OrixLeasing (2)

•SAHL (1)•Kiwane (1)

•GarantiLeasing (3)

(1) Local currency securitization(2) Local currency partial guarantee(3) Cross-border securitization(4) Cross-border partial guarantee

•Municipality of Tlalnepantla (2)

•Banco BBA (4)•MSFH (3)

•Triple A (2)•Banco Davivienda (2)•Titulizadora Colombiana (1) (three transactions)

•Diego Portales (1)

•Exportadores II (1)

•TelecomAsia(2)

•Emerging Asia CBO(3)

IFC’s TRANSACTIONSSTRUCTURED FINANCE

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IFC MORTGAGE SECURITIZATIONS

COMPLETED

IFC helping to structure

IFC guarantee on senior tranche

CMOSecondary MarketColombia - Hitos

IFC invested in mezzanine tranche

CMOPrimary LendingMexico – Su Casita

Help in structurePurchase several

tranches (first foreign investor in Won)

CMOSecondary MarketKorea - KoMoCo

Helped launch first mortgage-backed, local currency

Purchase mezzanine tranches

CMOPrimary LendingSouth Africa – South Africa Home Loans

ROLE OF IFCTYPE OF STRUCTURE

TYPE OFINSTITUTION

COUNTRY/INSTITUTION

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Where have we helped?

CURRENT HOUSING FINANCE PROJECTS

Argentina – BACS

Colombia – Hitos

Korea – KoMoCo

West Bank/Gaza –PMHC

Caribbean - ECHMB

SecondaryMarket

InstitutionsColombia – Hitos

India –NHB

Korea –KoMoCo

Mexico – Su Casita

South Africa –SAHL

Bulgaria – BACB

Baltic States – BalAEF

Croatia – ERSTE Bank

Estonia – Eesti Uhispank

Russia – Delta Credit

Lebanon – Librano Francaise, Bylblos Bank, Fransabank, BBAC

Argentina - BHNBangladesh – Delta

BRACChina – Advantage

ChinaEgypt - EHFCIndia – HDFC, Birla,

Dewan, Sundarem, Mexico –Su CasitaMorocco - CIHPakistan – IHFLRomania - RofinSouth Africa – South

Africa Home Loans (SAHL)

Sri Lanka – NDB

Capital Market or Structured

Finance

On-LendingPrimaryMarket

Institutions

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STABLE MACROECONOMIC ENVIRONMENT

PRIMARYMARKET

SECONDARYMARKET

CAPITALMARKETS

INCENTIVES(DEMAND)

ADEQUATEHOUSING STOCK

STANDARDIZATION OFGUIDELINES ANDDOCUMENTATION

TECHNOLOGY

ANCILLARYSYSTEMS

NEED FORLIQUIDITY

RISKMANAGEMENTTOOLS

LEGAL REGULATORY

GUARANTY

BUILDING BLOCKS OF SUCCESSFUL SYSTEM

OVERVIEW OF HOUSING FINANCE

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OVERVIEW OF HOUSING FINANCE

LAND DEVELOPERRE

AGENT/BROKER

BUYER

REGULATORY (CONTRACT ENFORCEMENT, CONSUMER RIGHTS, SAFETY/SOUNDNESS)

SUPPLY DEMAND

GOVERNMENT HOUSING POLICY/LEGAL STRUCTURE

BUILDER

•Land Usage•Zoning•State/Govt. ownedProperties•Titling•Permits•Old Stock•Rent Control•Fees (taxes, stampduty

•Financing landpurchase/construction•Incentives•Cost of construction•Time of construction•Building codes/standards

•Standards•Link borrower withPotential lenders•Fees•Listing data/salestransactions

•Disclosure•Legal documents•Property rights•Ownership/title•Choice of products•Competition•Affordability

BANKS

SPECIALIZEDLENDINGINST.

HOUISNGBANK

BUILDINGSOCIETY

INSURANCE

Public

Private

Public

Private

Universal

Mortgage

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WHAT IS A SECONDARY MARKET?

NOT NECESSARILY AN INSTITUTION

HOMEOWNERSHIP

ADEQUATE SUPPLYOF HOUSING

AFFORDABILITY

LIMITED FUNDING

NO LONG-TERMFUNDINGMOBIIZATION

OF FUNDS

MOREINVESTMENTPRODUCTS

SOCIALAWARENESS

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Preconditions For a Secondary MarketThe most critical factors to support the viability and sustainability of a secondary mortgage market are:

Stable or improving macroeconomic environmentSufficient legal, tax and regulatory framework Robust primary market operations and standardization Capital market preparedness and appetite for MBSEconomic incentives for secondary market participation

DEVELOPMENT OF SM

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WHICH WAY TO GO

No one model or“right answer”

Well-thought outplan betweengovernmentand private participants

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BEFORE YOU BEGINWHEN DEVELOPING A SECONDARY MARKET YOU HAVE TOLOOK BACKWARDS AND FORWARD BEFORE YOU BEGIN

•Originators – volumes andCapabilities, liquidity•Mortgage products (types,Interest rates, quality•Legal and regulatory environment•Investors•Role of government

•Needs of investors•International and domesticinvestor appetite•Rate environment•Legal and regulatory •Development of new instruments

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PopulationUnemploymentGDP GrowthInflationMortgages as a percentage of GDPInterest rates (deposits, lending)Breakdown of various assets held by banks (concentration)

Asset quality (delinquency, foreclosure, payoff rates)Key Drivers of EconomyDisposable IncomeSavings rateNumber of building permits issuedNumber/amount of new homes constructedNumber/amount of new home sales

MACROECONOMIC ENVIRONMENT

CONSUMERS FI’S INVESTORS

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Types of Institutions (commercial banks, housing finance companies, govt. housing bank, building society)Undue competition from the GovernmentInterest Rates/feesFunding sources/liquidityTypes of products (e.g. variable/floating rate, fixed rate, construction, rehab, 2nd hand)Standardized lending and servicing guidelines and documentationAsset quality

Adequate insurance providers (e.g. fire/hazard, credit default, life, unemployment)Credit bureausStandardized property evaluation guidelines and qualified evaluatorsTechnology capabilities (underwriting, delinquency control, foreclosures, cash management, securitization)Marketability and liquidity of the housing marketGood corporate governance and on-going concern

MARKET PLAYERS AND OPERATIONS

CONSUMERS FI’S INVESTORS

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Regulators for all FI’sLaws for mortgage origination (e.g. loan-to value ratios, concentration of mortgage assets)Ownership (sale and purchase of real estate)Clear title/registrationEnforceable liensTransferability/assignabilityForeclosure/repossessionEvictionLegal documentation

Trust/SPV/SPC LawsRegulators of Securitization and any Securitization Company(ies)Securitization and Securitization Company LawsNotification/approval by borrowerTax structureStamp dutyClean-sale TreatmentRecourseDisclosure requirements

LEGAL, TAX & REGULATORY ISSUES

CONSUMERS FI’S INVESTORS

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Good regulator(s)Existence and depth of capital markets (adequate information on all aspects of the size and nature of the market)Domestic and international capacity and appetiteInvestment guidelines for various investorsInterested and active investor base (preference and market share)Knowledge of investors of various investment productsSupportive broker/dealer network (structuring, placement, underwriting)

Efficient and regulated clearing/settlement systemsRating agency(ies)Active and deep swap marketInformation service providers (on assets and investment products)Structure of exchanges to facilitate trading of securitiesStandardized pricing, valuation and allocation proceduresDisclosure requirementsLiquidity of marketsCredit enhancement providers

CAPITAL MARKET DEVELOPMENT

CONSUMERS FI’S INVESTORS

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Tax TreatmentRisk Weighting – Capital ReliefProvisioningLiquidity RatiosClean Sale TreatmentInternational “Best Practice” bring new capitalBetter data

INCENTIVES

CONSUMERS FI’S INVESTORS

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VARIOUS FUNDING MECHANISMS

Mainly Phandbriefe (savings scheme with mortgage banks)

Germany

Mortgage-Backed BondsSome Short-Term Bullet Bonds for Adjustable Rate

Mortgages

Denmark

Mainly Mortgage-Backed Securities and Real Estate Mortgage Investment Conduits (REMIC) –issued by secondary market entities or individual institutions

Some Term and Demand DepositsCorporate Debt (Federal Home Loan Banks)

U.S.

Term and Demand DepositsGuarantee Investment ProductsFew Mortgage-Backed Bonds or Mortgage-Backed

Securities

Canada

Commonly Used Funding ToolsCountry

Source: Fannie Mae International Housing Finance Services

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VARIOUS PRODUCTS

Federal Home Loan Bank Model – loans to member institutions using mortgages as pledged collateral, but not taken off balance sheet

Credit Enhancements may include senior/subordinated, guarantees, mortgage default insurance, pool insurance, monoline insurance, reserve pool

Federal Home Loan Bank Model – bond financed for member institutions

Contract savings – deposit financed, specialized institutions offering loan-linked savings contracts

Pass through (GSE’s in US) vs. Structured (tranches, enhancements)

Mortgage-backed bonds with various structures

Unsecured corporate debt – not directly related to mortgages

Off balance sheet –bankruptcy remote

European Mortgage Model – bond financed-on balance sheet-specialized portfolio lenders

OTHERMORTGAGE-BACKED

SECURITIES

BONDS

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Mortgage Bond Issuers in Europe

Centralised issuing institutionsSwitzerland

Mortgage credit banksFinland

Mortgage companiesSweden

Mixed mortgage banks & Landeshypothekenbanken

Austria

Mortgage banksLuxembourg

Specialised banks (sociétés de crédit foncier) & centralised issuing institution

France

Any credit institutionSpain

Mortgage banks & public sector creditinstitutions

Germany

Mortgage banksDenmark

Type(s) of issuerCountry

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COLOMBIALegal Environment:• Law 546 of 1999 permits creation of

securitization companies including mortgage SPVs

• MBS benefit from tax exemption (through 2006)

• Banks required to originate “social housing loans” for low income sector, backed by 100% government guarantee (“VIS loans”)

• Structuring challenge: how to include VIS and non-VIS loans in same pool?

Selected InvestmentsSelected Investments

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IFC formed Titularizadora de Colombiana (“Hitos”) with 5 leading mortgage banks in 2001Hitos: the only MBS company in ColombiaCompleted 3 successful MBS issuesComplex structure involves VIS loans (gov’t guarantee) and non-VIS loans (IFC partial guarantee)Senior tranche (95%) rated domestic AAAMezzanine (1%) rated A Equity (4%) unrated and retained by sellers

Colombia Colombia -- MBSMBS

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Hitos MBS Guarantees StructureHitos MBS Guarantees StructureMortgage Bank

VIS Loans Non VIS Loans

SPV VIS E-3 SPV Non VIS E-3

Senior Bond

B Bond

Senior Bond

B Bond

C Bond

SPV TIPS E-3

MBS-TIPS Class A 2007, 2012, 2017 Series

MBS- TIPS B

MBS- TIPS Class C

IFC Guarantee

Covers Senior Bond cash flow

up to 2% of outstanding

principal

Nation guarantee(Fogafin)

Covers Senior Bond cash flow up to 100% of outstanding

principal

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Benefits to Colombia:Capital market development: second biggest growth marketDiversification of investment instrument

• Benefits to Mortgage Banks:More efficient use of capitalImproved profitability: servicing incomeNew source of funding for housing loans

Colombia Colombia -- MBSMBS

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New product for IFC -- long-term euro and local currency (peso) financing for a Mexican mortgage company targeted at construction phaseMexican company could tap IFC loan to fund “sub-loans” to developers for construction financing and pre-construction financing (roads, water lines, sewers and other infrastructure) in accordance with specified criteria

Mexico: Construction FinancingMexico: Construction Financing

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Construction “Sub-loans” will be assigned to a trust to secure IFC; thus segregated from other assets of Mexican mortgage companySub-loan repayments will accumulate within the trust and be available to fund additional sub-loans

Mexico: Construction FinancingMexico: Construction Financing

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Take-out risk is minimized:

INFONAVIT collects mandatory contributions from private sector employers/employees, which are applied to mortgage payments of moderate income home buyersFOVISSTE and FONHAPO fill a similar role for public sector employees

Mexico: Construction FinancingMexico: Construction Financing